Thursday, March 29, 2012

Here is an interesting snippet from MSN Money. It is a compelling argument against the continued 0 interest rate policy of the Fed and how it could have already started us on the road to extreme inflation.

How cheap money can backfire

The bankers' warning was this: While lower interest rates ease the pain of high debt, they reduce the incentive for businesses and governments to fix their debt problems. You can see this in the way Washington keeps avoiding the hard choices on the national debt and deficit. You can see this in the way Americans aren't really shedding their debt, aside from those defaulting on mortgages, and are instead using low interest rates to roll over lofty credit balances.
Low rates and a dramatic expansion in the monetary base have also failed to encourage any meaningful new borrowing businesses would use to increase production or hire more workers, thus stimulating economic growth.
In other words, with the banking crisis behind us, we no longer have a problem the Fed can fix. We need the White House and Congress to address our structural problems -- including inefficient health care, a broken education system, dilapidated infrastructure and foreign trading partners not playing by the rules -- to get the economy we want. This will create the jobs and the income needed to cut our overall debt levels and return the economy to a more normal footing with less volatility and drama.
At this point, all the Fed and its unchecked cheap money can do is cause inflation, push up commodity prices and damage growth, Shirakawa warned. In fact, this has already begun to happen. Led by the impact on gas prices, all the extra money is beginning to act as a negative factor. And growth is slowing as prices rise.
Using data from this week's report on manufacturing activity from the Federal Reserve Bank of Dallas, the chart below illustrates this. New orders are down. Yet prices paid for raw materials are up. Worse than inflation, this smells like stagflation, the most dangerous of the modern economic ailments. It's like a drug-resistant staph infection -- easy to catch but hard to kill. (Anyone who lived through the early 1980s and 20%+ interest rates can tell you how hard.)

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